Consultant says rate caps could hurt Texas utilities

By the OGJ Online Staff

HOUSTON, May 3 -- Texas' highly touted deregulation law bears a closer resemblance to California than most supporters would like to admit, says Frost & Sullivan energy analyst Amy Lange.

Like the California restructuring law, Senate Bill 7, the Texas Electric Choice Act, caps retail rates, while deregulating wholesale transactions. The Texas law also requires an additional 6% rate reduction by incumbent utilities.

Texas utilities must maintain the lower rates until Jan. 1, 2007, or until 40% of customers switch providers, at which time the utilities are released from price controls. Supporters say the so-called price to beat will allow enough room for new companies to enter the market creating healthy competition, and they say Texas will have an ample supply of generation unlike California. In addition, the Texas law also does not require spot market purchases of electricity as did the California law.

But Lange said if wholesale electricity prices do not behave as expected and spike above the price to beat, then Texas utilities can get caught in the same spiral that brought down two of California's largest utilities.

Pacific Gas & Electric Co. has filed for bankruptcy protection, while California's governor is trying to assemble a rescue package for Southern California Edison Co. The California utilities were paying more for wholesale power on the spot market than they could charge their retail customers.

Lange said Texas utilities also could be forced to pay more on the wholesale market than they can charge their customers. Texas utilities are somewhat more insulated because adjustments are allowed for fuel costs under the Texas scheme. However adjustments can be made only twice a year, undermining how quickly the market can change, Lange said.

The situation is compounded by unpredictable fuel fluctuations, especially considering Texas's "over-reliance" on natural gas, she said. Most of the state's 50 plants under construction or built since 1995 are gas-fired and supplies are tightening.

Another concern is that the price to beat is set so low that the headroom, or the difference between the retail providers cost and the price of power, won't attract potential competitors, she said.

Rates could skyrocket
"It's scary if you don't have enough competitors in the market," she said. If only one or two competitors were to compete in Houston, she said, they and the local utility could charge users whatever they want in 2007 or after 40% of customers leave Reliant Energy Inc.'s utility arm for another supplier.

The fear is the power suppliers will be not be able to secure a foothold because they are can't undercut the existing utilities' rates, Lange said. So after Jan. 1, 2007, when the price to beat goes away, rates from the remaining utilities could skyrocket.

Lange said the true advantages of competition can only take place by encouraging retail customers to respond to price changes. Lange said New Jersey's 5% mandated rate cut was so effective at insulating its electricity customers from price spikes, that many energy providers such as Power Direct and Energy America pulled out of the state's retail market.

Furthermore, only 2% of New Jersey's 3.1 million residential customers have switched to a new provider. She said such a low rate of customer switching raises concerns the already sluggish competition could completely fade away.

During the 1970s energy crisis, high energy price forecasts pushed consumption down, proving end users can react when prices create motives for efficiency, she recalled.

Similarly, real time price signals from hourly meters and time-of-using pricing will encourage retail customers to curtail energy use during peak periods today, Lange said, easing the extent of price spikes for everyone. Ultimately, she said, supporting participation in the load management market will help restructured markets operate far more efficiently.